The Myth of the Business Cycle

One of the first concepts a student of economics learns is the business cycle. According to the theory of the business cycle, every economy goes through four stages:

1. Boom – this is when the economy is flourishing.

2. Recession – when a boom leads to a burnout and inflation.

3. Depression – the rock-bottom of an economy, when there is massive unemployment.

4. Recovery – self-explanatory.

So what is the problem with this theory? It claims that this cycle is a natural process. In the past 200 years, you will find that there has been a continuous cycle of booms, recessions and depressions. Currently, we are still experiencing the effects of the recession of 2008. Greece is in a depression, while Spain and Italy are officially in a recession. So is the cycle a natural phenomenon? Well, to see how true this claim is, let us study a depression more closely.

At the onset of a depression, people generally find themselves with very less cash to spend. When they stop spending, consumer demand falls. With very low demand, firms and businesses reduce their production by laying off workers. Rising unemployment leads to a loss in income for the consumers, and they now have lesser money to spend. This leads to lesser demand, lesser production, more unemployment, lesser incomes… it goes on and on – a vicious spiral which grinds the entire economy down to a halt.

Now here’s the issue. During a depression, there is no shortage of labor, raw materials and machinery, land or entrepreneurship. People still want to work, but there is something lacking – money. You see, the moment there is even a small recession, all banks stop lending. On top of that, they call back all the loans they have made. With no money floating around, there is nothing for the people to spend; on the other hand, banks are sitting on heaps of cash while receiving trillions of dollars as bailouts. The CEOs and owners of these banks gain large bonuses and buy private yachts and jets, and property in Dubai, while lower-level workers are laid-off in large numbers.

What happens when money is injected into such an economy? With more money in hand, consumers start to demand more. Existing businesses expand and new ones open up, thus creating new jobs. As more workers find employment, households receive higher incomes. As demand rises, production increases, employment increases, incomes increase… an upward spiral which leads to a boom.

John Maynard Keynes, the famous economist, had said that during times of recession or depression, the government must step in and create more jobs through large-scale public works. He partly derived inspiration from Adolf Hitler’s policies during the 1930s. The Nazi government began large construction programs like the Autobahns in order to remove unemployment by creating new jobs and by bringing money back into circulation through government and public spending. This led to a sudden boom in the German economy, as the latent labor which was idle during the depression got to work.

So you see, as long as there is enough money floating around, there would be no depression at all. The moment money flies into banks, there occurs an acute shrinkage of the money supply which leads to a recession or depression. As the government starts spending, money starts circulating once more, and the economy emerges out of the depression. Thus, depressions are not natural but caused by banks so that they gain more power. How so? As I explained in a previous article, governments borrow money from these banks so that they can spend it. So, banks withdraw money from circulation, receive large bailouts, and then lend money to the government at high rates of interest so that the crisis can be “mitigated” (for the time being). With every recession or depression, banks gain more power.

It is about time we stopped the banks, lest we all find ourselves in slavery due to debt before we know it.

4 thoughts on “The Myth of the Business Cycle”

So, your suggestion is to have money managed and circulated by government by way of going in for public issue when there is a recession or depression, isn’t it? Will it work, since traditionally government borrows money from banks? Is this system to be changed?